Deepak Nitrite seeks right formula to revive investor interest
Dand FY23, as per Motilal Oswal Financial Services. This is much higher than the average P/E of 19.6 over the last decade. The valuation surge may be attributed to the notion that the high Ebitda margin would sustain on the back of pricing power.
However, high Ebitda margin seen in FY21 was a one-off and may be attributed to the significant decline in crude oil and its derivatives used as raw material and a temporary surge in chemical demand from India as China had shut down manufacturing. China has reopened for over a year, and the company’s Ebitda margin for FY23 fell to 16% and should stay at similar levels in FY24, according the trend seen in the nine months to FY24.
It earnings growth is primarily linked to capex-led volume growth rather than margin-led growth derived from pricing power. Its expansion strategy spans next five years, entailing investments of nearly ₹15,000 crore, primarily aimed at import substitution opportunities for phenolic derivatives.
The heavy outlay also means there will be a spike in its debt burden in the near future after becoming virtually debt-free in FY23. Moreover, a significant improvement in profitability is distant.
Deepak Nitrite’s challenge to sustain Ebitda margin within a narrow range over time, owing to the lack of pricing power and subsequent decline in the P/E multiple, should make investors realize that chasing specialty tag in chemical companies may not always yield good returns. it may not significantly renew investors’ interest in the specialty chemical stock.
Despite reaching its peak of ₹3,020 a piece in October 2021, the stock has traded below this level for over two years, and is currently trading at ₹2,125.50.
Following the covid-19 lockdown in China, investors began taking notice of specialty chemical stocks, including Deepak Nitrite. Subsequently, in 2021, the firm witnessed a steep rise of 500 basis points year-on-year in Ebitda margin to 29%.
There was a sharp re-rating of the stock with the one-year forward price-to-earnings multiple reaching 37.5 times in FY22 eepak Nitrite Ltd, a specialty chemicals company, has recently initiated backward integration by starting operations at its fluorination plant in Dahej, with an investment of ₹200 crore. The firm seeks to reduce its dependency on imported benzotrifluoride from China. However, the financial impact of this step will be relatively modest.
In line with the firm’s usual payback period expectation of three years, this may result in a 6% increase in Ebit of ₹1,171 crore recorded in FY23. Hence,